Assessment and Evaluation Flashcards

A customer's new account form shows 'speculation' as an investment objective. What does this indicate about appropriate recommendations?

Answer: Higher-risk investments with potential for large gains or losses may be consistent with this objective

A speculation objective indicates the customer accepts high risk in pursuit of above-average returns, permitting recommendations of higher-risk securities.

What does FINRA's guidance on concentration risk require a registered representative to evaluate?

Answer: Whether a recommended investment would result in an unsuitable over-concentration in a single security, sector, or asset class

FINRA suitability obligations require brokers to consider whether a recommendation creates problematic over-concentration given the customer's overall financial profile.

A principal reviewing a representative's business notices the rep frequently switches customers from one mutual fund to another within the same fund family. This practice is most associated with which violation?

Answer: Switching or churning to generate commissions

Repeatedly moving customers between funds primarily to generate commissions, without investment benefit, constitutes unsuitable switching and potentially churning.

Under FINRA Rule 2360, which factor is used to evaluate whether an options recommendation is appropriate for a customer?

Answer: The customer's investment objectives, financial situation, and options trading knowledge and experience

Options suitability under Rule 2360 requires assessment of the customer's financial situation, objectives, and specific knowledge and experience with options.

A registered representative updates a customer's risk profile without the customer's input after market losses reduce the account value. This action is:

Answer: A potential violation because customer profile updates require customer input and consent

Profile updates must be based on actual customer-provided information; unilaterally changing profiles to justify past recommendations is a compliance violation.

What does FINRA Rule 2090 ('Know Your Customer') specifically require of broker-dealers?

Answer: Firms must use reasonable diligence to know the essential facts about every customer and the customer's account

Rule 2090 requires firms to know essential facts about customers—including financial status, investment objectives, and authority over the account—to service accounts properly.

When a registered representative evaluates suitability for a customer approaching retirement, which change in the customer's profile is most significant?

Answer: A shortened investment time horizon reduces tolerance for illiquid or high-volatility investments

A shorter time horizon significantly affects suitability because the customer has less time to recover from losses, requiring a shift toward more conservative, liquid investments.